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The taxation of natural resources : principles and policy issues


  • Boadway, Robin
  • Flatters, Frank


Natural resources are typically subject both to taxation under the income tax system and to special resource taxes. Properly designed income taxes attempt to include capital income on a uniform basis. But in most countries the income tax treats resource industries more favorably than most other industries - through favorable treatment of such capital expenses as depletion, exploration and development, and the cost of acquiring resource properties. The case for special resource taxes is precisely to tax resource rents over and above the levies implicit in general income taxes. There are two justifications for this: (a) the efficiency-based argument that a tax on resource rents is nondistorting and complementary; and (b) the equity argument that the property rights to resources ought to accrue to the public at large rather than to private citizens since the rents represent the bounty nature has bestowed on the economy rather than a reward for economic effort. If the main purpose of a resource tax is to capture rents for the public sector, the base of resource taxes should be economic rents (or their present value equivalent), contend the authors. Actual resource taxes differ from rent taxes in significant ways. Unlike a general income tax - which allows the resource industries to understate capital income - resource taxes often overstate rents. This is because they typically do not offer full deductions for all costs, especially capital costs. Some systems tax revenues without allowing any deductions for costs; others allow the deduction of current costs only. As a result, they discourage investment activity in resource industries, encourage the exploitation of high-grade relative to low-grade resources, and make it difficult to impose high tax rates for fear of making the marginal tax rate higher than 100 percent. The authors discuss three alternative ideal ways for the government to divert a share of rents to the public sector: levy a tax on rents, ideally in the form of a cash flow tax; require firms to bid for the rights to exploit resources; and take a share of equity in the firm. They discuss these options in terms of their implications for the ability of firms to obtain finance, the allocation of risk, the share of rents accruing to the public sector, the extent of involvement of foreign firms, and other factors. The time has come in many countries, they say, when gains from further refinement of imperfect existing taxes on resources are less than replacing them with simpler, more efficient forms of pure rent taxes.

Suggested Citation

  • Boadway, Robin & Flatters, Frank, 1993. "The taxation of natural resources : principles and policy issues," Policy Research Working Paper Series 1210, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1210

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    Cited by:

    1. Eduardo Engel & Ronald Fischer, 2008. "Optimal resource extraction contracts under threat of expropriation," Documentos de Trabajo 244, Centro de Economía Aplicada, Universidad de Chile.
    2. Julien Daubanes & Pierre Lasserre, 2011. "Optimum Commodity Taxation with a Non-Renewable Resource," CIRANO Working Papers 2011s-05, CIRANO.
    3. Gonzalez, Patrick, 2013. "Taxing a Natural Resource with a Minimum Revenue Requirement," Working Papers 158572, University of Laval, Center for Research on the Economics of the Environment, Agri-food, Transports and Energy (CREATE).
    4. Orlov, Anton, 2015. "An assessment of proposed energy resource tax reform in Russia: A static general equilibrium analysis," Energy Economics, Elsevier, vol. 50(C), pages 251-263.
    5. Leonardo G. Romeo & Mohamed El Mensi, 2011. "The Difficult Road to Local Autonomy in Yemen: Decentralization Reforms between Political Rationale and Bureaucratic Resistances in a Multi-party Democracy of the Arabian Peninsula," Chapters,in: Decentralization in Developing Countries, chapter 15 Edward Elgar Publishing.
    6. repec:eee:jrpoli:v:54:y:2017:i:c:p:71-80 is not listed on IDEAS
    7. Boadway, Robin, 2005. "Income tax reform for a globalized world: The case for a dual income tax," Journal of Asian Economics, Elsevier, vol. 16(6), pages 910-927, December.
    8. Klomp, Jeroen & de Haan, Jakob, 2016. "Election cycles in natural resource rents: Empirical evidence," Journal of Development Economics, Elsevier, vol. 121(C), pages 79-93.
    9. repec:eee:eneeco:v:68:y:2017:i:c:p:466-477 is not listed on IDEAS
    10. Giorgio Brosio & Juan Pablo Jiménez, 2012. "The intergovernmental allocation of revenue from natural resources: finding a balance between centripetal and centrifugal pressure," Chapters,in: Decentralization and Reform in Latin America, chapter 10, pages iii-iii Edward Elgar Publishing.
    11. Sylvain Rossiaud, 2015. "L’ouverture de l’amont pétrolier à des compagnies privées. Un cadre d’analyse en termes d’économie des coûts de transaction," Post-Print hal-01162793, HAL.
    12. Patrick Gonzalez, 2013. "Taxing a Natural Resource with a Minimum Revenue Requirement," Cahiers de recherche CREATE 2013-6, CREATE.
    13. Jorge Martinez-Vazquez & François Vaillancourt (ed.), 2011. "Decentralization in Developing Countries," Books, Edward Elgar Publishing, number 14175, December.


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